Restaurant, casino bonds flash warning signals

The Hard Rock Cafe celebrates the opening of its new Times Square location by having people smash 100 guitars in New York August 12, 2005. A flight of consumers that sent home-goods retailers such as Linens 'n Things into bankruptcy may next strike restaurants, casinos and other leisure businesses.

NEW YORK (Reuters) - A flight of consumers that sent home-goods retailers such as Linens 'n Things into bankruptcy may next strike restaurants, casinos and other leisure businesses.

Tropicana Entertainment LLC already filed for Chapter 11 bankruptcy protection on Monday, and companies such as Hard Rock Park in Myrtle Beach, South Carolina, Six Flags (SIX.N) theme parks and Perkins family restaurants may face a brutal roller-coaster ride, based on how investors view their credits.

Profit margins for these "bread and circus" industries are getting squeezed as food prices soar and consumers spend less on travel and entertainment. The health of sectors that rely on discretionary spending may offer insights into the behavior of consumers, a crucial factor in determining the severity of the U.S. and global economic slowdown.

"You can take a vacation, but it doesn't mean you have to travel to Las Vegas," said Andrew Harding, who oversees about $19 billion as chief investment officer for fixed-income at Allegiant Asset Management in Cleveland.

"You have to eat, but you don't have to go to a restaurant," Harding said. "Companies that are tied to discretionary income rather than necessity are going to get hurt."

HRP Myrtle Beach Holdings, for example, relied on debt to build Hard Rock Park, America's newest $400 million theme park, including a "Led Zeppelin" rock 'n' roll coaster. Hard Rock bonds, like those of Six Flags and Perkins, are among bonds now trading at the most distressed levels.

A bond is considered distressed if it yields at least 10 percentage points more than Treasuries. When demand for a bond drops, its yield rises, indicating a higher perception of risk compared with investing in ultra-safe government bonds.

Hard Rock and Six Flags debt both show a 43 percent chance of a default within the next year, based on where the bonds and credit default swaps -- a form of bond insurance -- are trading, according to Moody's.

Spokespeople for Hard Rock, Six Flags and Perkins did not return calls to comment or said they do not comment on how their bonds trade.

The volatility roiling those bonds first appeared in securities of retailers such as Linens 'n Things, which struggled in the wake of the U.S. housing bust. As the credit crisis endures, signs of stress are spreading to sectors that rely on U.S. consumers to spend money on leisure.

Tropicana became the largest corporate bankruptcy this year when the casino owner said it missed an interest payment last week on a $1.3 billion loan with Credit Suisse Group. Its bond yields had surged to more than 20 percentage points over the yield on comparable Treasuries in recent weeks, a sign of severe distress.

Tropicana lost its New Jersey casino license last year and its bankruptcy filing underscores the fate of casinos suffering as gambling revenue wanes during an economic slowdown.

Trump Entertainment Resorts Inc TRMP.O on Thursday reported a wider quarterly loss, citing a general weakening of the economy.

Bonds of Trump, Harrah's Entertainment Inc and Station Casinos Inc are distressed and indicate the companies have an almost one in three chance of defaulting within the next year, according to Moody's Credit Strategy Group.

While distressed trading levels don't necessarily mean a company will default or even go bankrupt, distressed levels are often a precursor to such an outcome, as in Tropicana's case.

Moreover, the overall number of U.S. high-yield bonds trading at distressed levels has soared to 17 percent through the end of April, versus just 2 percent last year, according to Moody's. Tropicana's bonds reflected the highest chance of default, at 54 percent.

"There are a host of gaming companies that are actually having difficulty," said Michael Henkin, managing director at Jefferies & Co's advisory business for distressed firms. "That's one area that we're going to see more of."

Restaurants also are feeling the pinch as staple food prices have soared more than 40 percent in the last year, resulting in higher costs for businesses.

Other companies at risk include Perkins family restaurants, majority-owned by New York-based private equity firm Castle Harlan Inc, and OSI Restaurant Partners, owner of eateries from Outback Steakhouse to Cheeseburger in Paradise. Both show at least a one in three chance of defaulting on their debt within the next year.

A spokeswoman for OSI didn't return a phone call or e-mail seeking comment. OSI is the biggest U.S. casual-dining restaurant chain, with more than $4 billion in sales and 1,480 restaurants.

"We're seeing an awful lot of pressure on family restaurants at the moment," said Jerry Mozian, a director of restructuring at Tatum LLC, an Atlanta-based consultancy. "We're seeing more and more of those get into heavy distress."

(Additional reporting by Emily Chasan; Editing by Frank McGurty)